Xiaomi Exec: 'We're Playing a Completely Different Game'

In 2013, former Google executive Hugo Barra made a move that stunned Silicon Valley observers: He left his high-ranking job at the search giant’s Android unit to take a post at Xiaomi. At the time, few in the U.S. had heard of the upstart Chinese smartphone firm. But Barra saw the company’s potential. Investors now value it at $45 billion; some call it the “Apple of China.”

Today, there are signs that Xiaomi’s rocket ship is heading back to earth. The company failed to meet smartphone sales expectations last year, leading some to voice concerns it was facing slower growth.

Barra, now Vice President of International at Xiaomi, spoke with TIME to make the case that the company’s best days are ahead. What follows is a transcript, edited for length, of our discussion.

What does innovation mean for Xiaomi and where is its impact being seen the most?

Xiaomi is a software company that innovates. A Xiaomi phone is the phone that has a magic selfie camera which guesses your age and makes you look better. We’ve been successful particularly in China by offering software services that don’t normally come with phones. It’s not just about the phone, it’s about the software experience. We’ve also become pretty widely recognized as innovators on the hardware side. People are recognizing Xiaomi as a company that launches features that they haven’t seen before and they expect this from us.

Our business model is another innovation that has gotten us ahead in this market. We don’t advertise and we don’t sell in stores. People come directly to us. They hear directly from us in social media like they would from their friends, as opposed to being talked at from a brand. This gives the brand a feel that is dramatically different from other brands that you would see in this industry.

One of the fastest-growing areas of our business is the smart home and the Internet of Things business, which is essentially launching a new consumer electronics product every month. When we have a great product idea, we ask our users, “What do you guys think of this? Would you buy it? Are you in fact willing to make a deposit to buy this product?”

The one we launched this week was a high-performance bicycle that was made by one of our portfolio companies and sold through our e-commerce store. It’s potentially the most expensive product we’ve ever made, which is about $3,000, but it quickly exceeded the crowdfunding bar on our e-commerce store. By not being here you don’t experience some of this daily innovation, but the company is extraordinarily well-regarded as an innovator.

What are some of the biggest misperceptions in North America and Europe concerning the company?

One of the biggest misperceptions is that people don’t understand that we’re so different, that we’re trying to get a very different place. Think about it this way. Xiaomi entered a market that is extremely competitive, which is the smartphone industry. Our goal in this market is not to play the same game as everybody else. Why would we enter such a competitive market and play the same game as everyone else?

We’re in a market where our goal is to acquire Internet users, people who are young and who use their phone a ton for a variety of different things, and to extract revenue through a bunch of different services that they want to use. If we succeed, it means we could even sell a phone for zero profit — which we don’t do today, to be clear — and that would wipe out the competition because we would have completely changed the game.

Today we ship about 50 apps on all of our phones in China, which already have at least 10 million monthly active users each. If you were to use any reasonable investor [venture capital] metric, you would quickly conclude that pretty much any one of these 50 apps could be a pretty successful startup on its own with numbers like this. We have 20 apps that have over 10 million daily actives, which is a much higher engagement level.

By having this level of engagement, we have essentially created a massive platform of user engagement that’s highly monetizable. People spend on average four and a half hours a day using our devices, meaning they are actively doing something on their phone. A very high percentage of the time they are using an app that we developed. We are the number three app store in China. We’re in the top two or three video content apps on phones. We have the largest video content library, with over 400,000 hours of content.

So we’re playing a completely different game. If you look at our revenue per user per month last year compared to the year before, it nearly doubled. And there’s still extraordinary room for growth considering we’re just beginning to push the envelope on monetization. We make profits on phones today, but for us what matters is not selling a phone. What matters is acquiring an Internet user, which is why we live in the online channel. We’re the third largest e-commerce company in China by GMV [gross merchandise value]. We’re going after people who buy a phone online, so these are naturally more engaged users than the average guy who buys a phone in a shop on the street.

Because Xiaomi is private and didn’t disclose revenue or profit figures last year, there’s kind of a black-box effect, where people will interpolate about how it’s doing. How can you you show Xiaomi is growing and meeting its goals?

We are not and will not be in the business of disclosing financial data because it really isn’t a healthy practice for a private company. First of all, we are growing smartphone sales in a market that has already flattened. And we’re doing this because we’re continuing to gain share as retail shifts from offline to online. We have nearly 50% of the online market share in China, so we completely dominate and nearly monopolize the online market here because there’s such a strong preference for phones online.

Second, we continue to have more engagement in terms of people using our apps and our services, including the ones that generate revenue — particularly the app store, our video subscription service, and many other things.

Third, I would point to our international business. We entered India in the third quarter of 2014. Today, we’re the number three player in smartphone sales via e-commerce there. In the third quarter of 2015, we sold more than 1 million phones, and we grew last year at a 45% average, quarter-on-quarter. We broke a massive record last week when we received close to 1 million registrations for one device, the RedMi Note 3. We’re essentially reproducing the exact same recipe that we built here in China. We are going to enter the Internet services business in India with the same model we have in China.

What have you learned as you’ve entered India? What surprised you and what were some unexpected obstacles?

India has turned out to have one of the most sophisticated and demanding consumers that we’ve ever seen. I get emails from Indian users every other day. They tell us all the time what we should do and how we should price things. They dictate features that they think should be part of the next device. They have a well-informed and strong opinion about our products.

When we launch a product in India, I spend more time explaining the technical details than I have ever done in any type of presentation for my entire career. And I used to do a lot of presentations when I was at Google. So that was a pleasant surprise. Consumers in India care about details more than we ever expected. That’s a good thing, and it’s actually a competitive advantage for us because we’re well positioned to cater to them.

One thing that surprised us is how much Indian customers care about after-sales service. They will decide which phones to buy based on whether they can get it repaired in case the phone has a problem. Because we can’t build hundreds of repair centers from one day to the next, we had to come up with a new approach to repairs, which is to pick up the device at the customer’s house or office. Anywhere in India, they can just call us or email us and we’ll come by bicycle and return it the next day repaired. This is something new we’ve never done before. It was an innovative response to a new customer demand.

In Brazil, we also rolled out the same pickup service. Which is a huge country and so it was a big operational challenge. The customers there are not as demanding as the Indian customers but we still thought the pickup service was a good idea and it saved us time and money in rolling out physical repair centers.

What are some of your other goals for 2016 in terms of markets, products, and areas of growth?

A big goal for us in China this year is to continue to build a bigger business on the TV side. Our business model for TVs in China is very similar to our business model for phones, which is to sell extremely high-quality hardware, which is essentially a gateway into Internet services. Just this week we announced our 65-inch curved-display TV. It’s the most expensive TV we’ve ever sold and yet is just over $1,000.

We also announced our first annual subscription plan for 299 RMB, discounted to 199 RMB if you purchase it with the TV, so that’s about $50. It has unlimited content. The business model is to sell the TV at a price that’s pretty close to cost and then make money on content. This TV will surely be sold out for the next few months as people try to get their hands on it. We also hope to bring the same business model to other countries, most likely starting with India.

Another area that will be big this year is the Xiaomi ecosystem. We have about 55 or so portfolio companies that we funded, which design and manufacture consumer electronics products that we sell: Our wearable fitness band, air purifier, and the high-performance bicycle I mentioned. These companies are starting to roll out Xiaomi-branded products, which are smart in the sense that they have [Internet of Things] chips in them. These products carry a significant margin relative to phones, so they’re very profitable products.

We consider these products as part of our recurring revenue strategy. People spend money on apps, games, and video content on our phones. But they also buy these devices directly on their phones. As soon as there’s a new product, we notify them so they know right away, and a fairly large number of these users are buying a new product every few months. These are profitable products so it contributes to this idea of selling well beyond what they get when they buy the phone. Most of these companies have not released their first product, but they will this year. It’s a pretty exciting roadmap ahead.

How do Xiaomi’s investments in these companies work?

Most of these companies we seeded or did a Series A. In many cases we put the founders together ourselves, we kind of created the company. We give them money and we take a stake as an investor just like any other investor would. We don’t get a discount or anything. We just take a stake early on as a strategic investment. And then we connect them to our supply chain and our manufacturing partners.

We have a team of 200 people today who essentially take care of these portfolio companies. They help them with engineering here and there when necessary, get them off the ground to launch their first product, and handhold them through the process. And over the time they grow. A few of these companies have already raised several subsequent rounds of funding. A few of them are already over $1 billion in valuations. So they’re “Xiaomi ecosystem unicorns.”

One example is the company that makes power banks. Xiaomi is the most popular and largest power-bank brand in the world. Another is the wearable company [Huami], already the second largest in the world in terms of shipments. Another is our audio-products company called 1More. They’re already recognized for making some of the best audio products in the world. They’ve been winning both design and audiophile awards around the world.

How much cash does Xiaomi have today and how is it going to be used?

We raised $1.1 billion in our last round of funding in December 2014. Our operations are self-sufficient and have been profitable for quite a while. We raised the round of funding because we wanted to increase our investment firepower.

We invested about $300 million in iQiyi and we invested a significant quantity in Youku, both of which are leading video content providers in China. We invested close to $200 million in Midea, which is one of the largest domestic appliance manufacturers here in China. The strategic investment was the result of an agreement that they would start building our [Internet of Things] chips into their products.

We’ve also been investing in content licenses as well, which we often do through prepayments. We’ve invested close to $1 billion in video content licenses alone, which of course is building a business for the next few years. We still have plenty of cash left in the bank — I think our CEO recently said $1.5 billion dollars. It’s really investment firepower for new strategic efforts in China and outside.

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